DALLAS -- The Oklahoma City school board is blaming its financial adviser, Stifel, Nicolaus & Co., for the district's participation in a controversial cash management program that led to an Internal Revenue Service claim for arbitrage rebate and has demanded the company fork over damages.
"It was a problem we had not created," said Cleeta John Rogers, the district's general counsel. "We wanted them to take over the IRS problem."
He said Stifel officials refuse to settle the claim with the IRS, which maintains that the district owes more than $1 million in arbitrage profits, penalties, and interest for its participation in the 1990-91 cash management program. Additional rebates could be charged for the 1992-93 program.
"Stifel wants us to pay it," Rogers said. And, he said, "we want them to pay it."
He said Stifel's refusal prompted the school district last month to decline to settle the IRS bill. Using taxpayers' money to pay the rebate would violate the state constitution, which requires that such money must go to a public purpose, Rogers said.
Stifel officials either could not be reached or declined to comment, but the firm issued a terse statement saying that governmental institutions pay rebates as a matter of routine and that it is legal.
The standoff is one of the latest developments in a long-running controversy over the district's participation in a cash management program in 1990-91. The dispute was disclosed for the first time when the school district board approved a resolution in connection with the cash-management program at a special meeting on Tuesday.
Under the resolution, the board will ask Oklahoma's attorney general whether the state constitution allows the district to pay the IRS claim. Depending on the answer, the board could reverse its decision and pay the IRS rebate, Rogers said.
In addition, he said district officials were not ruling out the possibility of replacing Stifel as financial adviser or suing the firm for the damages, rather than just requesting the money. He said no such action had been officially discussed, but "all those things were open."
In the resolution, district officials claim that Stifel and others urged them to participate in the cash management programs, saying the district would be able to earn a profit that was both legal and proper. But later the IRS gave opinions to the contrary.
Under the 1990-91 cash management program, the Oklahoma City school district issued $30 million in tax-exempt tax anticipation and revenue notes to cover a projected budget deficit. However, it faced no budget shortfall, and instead, the district earned $252,095 in arbitrage profits.
As a result, the IRS said the district appeared to have exaggerated its budget deficit and demanded rebate of the profits, plus penalties and interest. In addition, $17 million of bonds floated in the 1992-93 program and $73,620 in profits could be affected, Rogers said.
St. Louis-based Stifel, the state's largest bond underwriter, has indicated in the past that the school district was to blame for the miscalculations. "If there was a miscalculation by the schools as to the amount of money they would need to borrow, then that issue must be addressed between the school district and the IRS," Stifel executives said in a prepared statement issued in September.
However, industry sources said Stifel prepared the figures from information provided by the school district and required the district to sign an agreement saying it would repay arbitrage profits.
A taxpayer group charging that Stifel and other bond firms should be held responsible for misleading the school district sought to recover damages under state laws.
"The only way they can satisfy the rebate demand legally is to go after the orchestrators of the program," said Larry Patton, an Oklahoma City attorney representing the taxpayer group.
Last month, the group filed a lawsuit against Stifel and others who profited from the program, as well as the school district, but withdrew it when the board refused to pay the IRS because no damages to the taxpayers could be incurred without payment. The group has threatened to refile if the board pays the rebate.
"We are in the position of being lunged at by both sides" -- the taxpayer group and Stifel, Rogers said.
In the meantime, Rogers said, the IRS has not told the school district what the agency might do because of the board's refusal to pay, or when it might act.
Industry observers said the IRS could tax the bondholders or blacklist the school district, jeopardizing the tax-exempt status of future issues. However, the IRS has not blacklisted an issuer in the past, industry sources said.
